So you’ve laid the groundwork to keep the cash flowing by addressing the strategic aspects of managing cash flow. But, experts will tell you that managing cash flow also requires tactical actions designed to get you the results you want. Make sure you take into account these vital 6 aspects to keep your cash in check.
Don’t confuse cash flow with cash on hand. Your cash should always work for you, collecting interest or other form of return.
1. Schedule Your Cash Flow
The schedule determines when activities take place, and scheduling also determines when you get paid for portions of the work. Often, there are activities that affect other activities that are two, three, or more steps removed. For example, framing the walls is a prerequisite to finishing them, because before you can finish them they need insulation, electrical, and plumbing installed.
Therefore, you can’t bill for a completed wall system until all that work, plus the drywall, plus the trim, plus the paint is completed. This means there’s a very long wait to get paid for completed walls. So, when you draft your schedule of values showing amounts due at various intervals for progress on the contract, make “wall framing” a payable line item, instead of “completed walls.”
If you use completed walls as a payable item, you will outlay the money for framing early in the project, and then carry that debt until the walls are completely finished. That’s going to negatively affect your cash flow. So, pay close attention to the schedule of values and try to shorten the time you carry the costs for work put in place.
2. Avoid the Resource Poverty Trap
Each construction project is different, and, if you are handling multiple projects at the same time, your exposure to cash flow problems related to resources is high. Equipment is one resource that can quickly devour your cash when things don’t go as planned.
For example, imagine you have three projects underway and when you started the second project you added three pieces of equipment to your fleet. Because of things beyond your control, you didn’t need that equipment for the third project, but you are still paying for it. Meanwhile, your cash flow has tightened, and even though there’s a fourth project waiting in the wings where you’d likely use the equipment, the start date is still months away.
Now you’re left with one painful option of liquidating the equipment quickly, and most likely not going to get what you need to pay it off. A less painful option is to lease or rent the equipment to others who need it. But, that comes with its own set of issues such as paying for too much office space or hiring too many people. But, the bottom line is this: Resources can sink your cash flow so don’t make them long-term obligations unless you are absolutely sure they’ll get used when and where you need them.
3. Retain Retainage
As a GC, you know owners often present retainage clauses in contracts. If 10% of the total contract is withheld from you until completion, then that’s 10% you are contributing to the financing of the project. Accountants will advise you to retain a portion of subcontractor payments to offset the retainage imposed by the owner.
4. Claim and Collect
Getting highly efficient with how you handle billings for change orders can help offset money you have floating on activities that might have been completed weeks or months ago. The same goes for claims. And, in both cases, if payments are delayed, then you should require interest so you can recoup the cost of extending this form of credit.
5. Question the Budget
If you’re working with a budget that isn’t accurate, you’re in for some surprises. When you initially review the budget, check on the processes people use for reporting work completed. These processes need to return highly accurate numbers. If they don’t, payments will be delayed. Furthermore, have a deep budget review on a regular basis where you ask yourself, and others, all the tough questions about what’s getting done, and what it’s costing.
6. Look for Cash-Saving Opportunities
Reductions in costs that don’t affect quality can bolster your cash position. One area where GC’s often bleed cash is in the insurance and bonding they carry. Your risks change with every project, and they change as projects come and go. You need to regularly review your coverages so that you are covering only the risks that exist, and are getting the best value for your money.
Finally, don’t confuse cash flow with cash on hand. Your cash should always work for you, collecting interest or other form of return. You also need to consider the state of the economy when making decisions about your cash positions. Having cash available during times when economic growth is slow, or nonexistent, puts you in a position to jump on opportunities. Getting top returns on cash when things are booming allows you to invest for the future.